Professor Edward Desmarais
Business Policy and Strategy
Fall 2004
Continental Airlines
Case Analysis
by: The Brain Busters
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TABLE OF CONTENTS
I. Executive Summary 3
A. Mission 3
B. Vision 3
C. Objectives 3
D. SWOT Summary 7
E. Recommendations 8
II. Current Situation 9
A. Current Performance 9
B. Strategic Posture 10
IV. External Factors 34
V. Internal Factors 156
VI. Action Plan 231
Appendix A. Stakeholder Worksheet 245
I. Executive Summary
A. Mission
Continental is a major commercial airline that transports passengers traveling on business or leisure to destinations around the world while providing convenient, dependable, high quality service.
B. Vision
To continue looking for ways to improve performance, reduce costs, and increase revenues by listening to customers, responding to their needs, and continuing to improve the organization’s culture.
C. Objectives
Short-term strategic objectives
· To become the fourth largest commercial airline in 2 years.
· To expand Continental Express by 10% in the Southeast in 3 years in order to gain market share in that area without having to commit large planes with high break-even margins.
· To reduce the number of aircraft types to 4 in 3 years in order to continue to bring down maintenance expenses.
· Increase the amount spent on researching customer preferences by 5% in the next 3 years.
· Reduce operating cost per available seat mile by 2% in the next 3 years.
· Reduce on the job injuries by 5% in 2 years by providing better safety training.
· Increase hedging of fuel costs by 5% annually for the next three years.
· Decrease voluntary turnover rate to 4% in 3 years.
· Reduce absenteeism rate by 5% in 2 years.
· To add three new domestic destinations to Continental’s regular service each year for the next three years.
· To add 10 new cities to Continental Express within 3 years.
· To increase the percentage of total sales from e-ticketing by 10% in 2 years.
· To increase the number of independent websites that are allowed to book Continental flights by 5% in 3 years.
· On-time arrivals to 84% within 2 years.
· Remain in the top 3 companies in terms of on-time arrivals for 18 consecutive months.
· To be named the “Most Admired Airline” by Fortune magazine within 3 years.
· Reduce the number of passengers involuntarily denied boarding by 10% in 3 years.
· To reduce the percentage of mishandled baggage by 5% in 3 years.
· Increase the benefits of the frequent flyer program by 5% in 2 years.
· Continue international expansion. Add flights to fifteen new foreign cities within 2 years.
· To continue having more international flights than any other rival for the next three years.
· Spend 5% more on researching new information systems within 3 years.
· Send out 5% more surveys within the next 3 years.
· Increase the number of employees focused solely on innovation by 5% in 2 years.
· Increase the number of Continental and Continental Express flights by 10% within the next three years.
· Rank within the top three major commercial airlines in terms of the percentage of customer complaints as measured by the Department of Transportation within 2 years.
· Rank within the top three in terms of customer satisfaction within 2 years.
· Increase the monetary incentives for flight attendants to book passengers on Continental flights by 5% in 2 years.
Long-term strategic objectives
· To become the 1st or 2nd largest airline in 10 years.
· To dispose of all older aircraft within 10 years so that the maximum age of any aircraft in the fleet is 8 years old.
· Increase research expenditures by 10% in the next 10 years.
· To reduce interest costs by 15% in 10 years by paying down debt and financing new growth by issuing stock.
· To increase the number of first class seats by 10% in 10 years.
· Increase e-ticketing to 99% of their destinations in 8 years.
· On-time arrivals to 87% in 10 years.
· To receive the Air Transport World “Airline of the Year Award” for 7 out of the next 10 years.
· To increase customer service incentives for employees by 15% within 5 to 10 years.
· Rank number one in major commercial airlines for having the fewest number of baggage complaints within 5 to 10 years.
· Add three new hubs in International markets within 10 years.
· Reduce the amount of time it takes to produce financial results by 15% in 10 years.
· Increase the number of services offered to customers by 10% in 10 years.
· Increase the number of planes the company has to fly those flights by 7% within 10 years.
· Reduce the number of bumped passengers to 2% in the next 5 to 10 years.
Short-term financial objectives
· To increase the percentage of growth by 6% in 3 years.
· Increase earnings by 20% in 2 years.
· Raise the diluted earnings per share by 5% in 3 years.
· Raise profit margin to 5% within 3 years.
· Increase percentage of sales from code-sharing agreements by 5% within 2 years.
· Increase EVA by 5% within 3 years.
· Increase MVA by 5% within 3 years.
· Lower debt to equity ratio by 8% in 2 years.
· Receive the most-admired U.S. airline award from Fortune magazine within 3 years.
· Continue to have a 30% growth rate with Continental Express for the next 3 years.
· Reduce costs during times of recession by 5% within 1 year.
· Increase ROA to 4% within 2 years.
· Maintain an ROE of 30% for 2 years.
· To increase the amount of cash on hand by 10% in 3 years.
· Increase current ratio by 10% in 3 years.
· Improve net working capital ratio by 4% in 3 years.
Long-term financial objectives
· Achieve an average of 18% revenue growth over the next 10 years.
· Increase earnings by 50% in 8 years.
· Raise the diluted earnings per share by 15% in 10 years.
· Pay a 1% dividend within 5 to 10 years.
· Raise profit margin to 7% within 8 years.
· Increase load factors by 15% in 8 years.
· Reduce the number of flights with a profit margin less than 1% by 20% within 10 years.
· Increase EVA by 10% in 10 years.
· Increase MVA by 12% in 7 years.
· Have a 2-1 debt to equity ratio within 10 years.
· Receive the award for Tops in Customer Satisfaction by J.D. Power and Associates for 9 out of the next 10 years.
· Expand the number of Continental Express destinations by 25% in 10 years.
· Increase market share by 10% within 8 years.
· Increase the number of routes with a profit margin above 8% by 20% within 10 years.
· Increase ROA to 9% within 15 years.
· Improve ROE by 10% within 5 to 10 years.
· To increase current ratio by 20% within 10 years.
· Improve net working capital ratio by 8% in 10 years.
D. SWOT Summary
· Information systems
· Advertising and promotion
· Product and service innovation
· Ability to continually improve quality
· Technological know-how
· Culture
· Brand name
· Alliances and cooperative ventures
· Attractive customer base
· Wide geographic coverage
· Image
· Location of operation facilities
· Regional service
· Recognized industry leader
· Reputation for customer service
· Intellectual capital
· Fixed asset utilization
· Age of aircraft / Opportunities
· Large quantity of buyers
· Extent of rivals vertical integration
· Population demographics (opportunities for growth)
· Changing societal values
· Feeder routes
· International routes
· Bargaining power with some suppliers
· Extent of rival’s horizontal integration
Weaknesses
· High overall operating cost
· Limited access to financial capital
· Cost disadvantages
· High debt to equity ratio
· Financial position – cash flow / Threats
· Economic recession
· Legislative, regulatory, and political environments
· Technology
· Mature market
· Exit barriers
· Volatile fuel costs
· Rivals using competitive weapons
· Extent to which rivals use economies of scale
· Large number of rivals similar in size
· Low buyer switching costs
· Increasing buyer knowledge level
· Degree of alliances
· Long term industry growth rate
· Industry profitability
E. Recommendations
· Develop a cost conscious culture.
· Hedge jet-fuel purchases.
· Share ground operations with other airlines.
· Renegotiate leases.
· Advertise service features on websites where plane tickets are sold (ex. Orbitz, Expedia).
· Have flight attendants hand out surveys encouraging passengers to identify what they would like the airline to offer in the future.
· Have top management work directly with flight attendants in finding innovative ways to improve services.
· Redesign the OnePass frequent flyer program to make it more attractive to leisure passengers.
· Increase advertising and double bonus miles when rivals use price cuts.
· Increase fares on routes with high passenger traffic when the planes are flying at or near capacity.
· Increase the number of profitable flights Continental and Continental Express are flying and remove flights with low profit margins from the schedule.
· Defer delivery of new aircraft on order.
· Enter into additional code-sharing agreements.
· Add additional international routes and destinations with high profit potential.
· Open a new hub in Europe.
II. Current Situation
A. Current performance
Continental’s performance has improved since Gordon Bethune became CEO in late 1994. The company’s revenues grew at a rate higher than industry average between 1995 and 2000. In 2000, Continental was the fifth largest commercial airline, in terms of market share, with 9.632% of the market. In the same year, Continental had more international flights than any of its rivals. By September 2001, Continental had 2,500 daily flights (Continental and Continental Express) and showed profits for 25 quarters in a row.
There is intense rivalry in the airline industry. Continental has a strong position relative to most competitors. They have improved the quality of their service and listened to customer’s needs to increase their revenues and reduce their costs.
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B. Strategic Posture
Chapter 2 Worksheet
Mission
Criteria / Facts / What does this mean?What is our business? / Continental is a commercial airline that operates in both foreign and domestic markets. Continental transports first class and coach passengers to cities around the world.
In 1994, it was the fifth largest commercial airline with revenues of nearly $6 billion.
Continental was in Chapter 11 bankruptcy in 1983 and a second time in 1990. It emerged from the second bankruptcy in 1993.
Continental had ten CEOs in ten years time.
By September 2001, Continental had 2500 daily flights (Continental and Continental Express) and showed profits for 25 quarters in a row. / Continental provides a means of travel in an Industry with a great deal of competition. Because of this competition, Continental must find ways to meet the needs of customers in ways superior to that of rivals. The company did not have a clear idea of how to do this until Bethune entered the organization.
Who are our customers (stakeholders)? What do we do for each of them?
How (technology used or functions performed) do we meet their needs and expectations? / “See stakeholder analysis worksheet” / “See stakeholder analysis worksheet”
How do we communicate the mission to our organization and our customers (stakeholders)? / Before 1994, Continental’s top management was cut off from employees. It was a top down organization with low morale, high turnover, high absenteeism, and low wages. The culture at Continental was very poor and employees resisted any changes passed down by management. Employees were used to fighting with each other over resources, worrying about layoffs, and pointing the finger of blame. Employees were not kept well informed by management.
When Bethune came aboard, he realized he needed to focus on the culture of the organization in order for employees to buy into the new mission. He apologized to stakeholders and ensured them that Continental was going to improve.
Bethune communicated the new mission by:
Propping the door open to his office (it used to be shut and guarded by security cameras)
Meeting directly with employees at all major locations and levels of the organization.
Sitting at the middle of the boardroom table during meetings and discussing each topic in the same order outlined in the “Go Forward Plan.”
Installing 600 bulletin boards and LED displays to keep employees posted.
Inviting top business customers to his home, apologizing for past mistakes and giving them a leather ticket case as a show of thanks.
Painting all planes to match as a symbolic way of showing Continental was under new leadership and changes were being made.
Burning manuals in the parking lot and empowering employees to use their own judgment when handling problems. Encouraging employees to make decisions and involve headquarters as a resource when they need to.
Having executives personally call old business customers to apologize and let them know about the new Continental.
Allowing employees to make suggestions to top management. Improve communication at all levels.
Providing a voice mail number to the CEO so that employees can contact him directly.
Created incentives for employees to work together and achieve the organizations objectives (ex. On-time bonuses, Absenteeism bonuses).
Gatherings sponsored by the company for employees to spend time with each other and network.
Monthly employee newsletter, Continental Times. This newsletter included information about how well the company was doing and reporting on any new changes.
Mailing quarterly newsletter, Continental Quarterly, to employee’s homes.
Bethune contacted travel agents and provided them with incentives for business passengers to try Continental. Bethune reinstated programs that helped travel agents to promote Continental.
Creating the slogan “Dignity and Respect” in 1996.
/ The mission is communicated in a variety of ways in order to reach all stakeholders. The goal is to get all stakeholders on the same page. Everyone must have a clear idea of what the company is doing.
By communicating the mission to everyone, it helps to create a team atmosphere that encourages synergy.
The missions of individual divisions can then be formed based on the company’s overall mission.
With a clearly defined mission stakeholders can make recommendations and give feedback.
The mission communicates to the stakeholders what the company is doing daily to differentiate their product from that of competitors.
Bethune went too great lengths to make sure stakeholders were kept well informed. This is very different from prior management. When stakeholders know what is going on they are more likely to want to participate and buy into changes.
Vision